Investor Confidence In Check as Unknowns Multiply

The last 3 weeks we have seen common stocks move lower by over 6%–which means that at current levels the S&P500 is 11% below the 52 week high.

This mover lower is something I have expected–and the way it is occurring–not in a panic, but in an orderly fashion (in spite of 500-700 dow point moves) is just the way I want to see stocks fall. When common stocks move lower in an orderly fashion we don’t reach the point where the ‘baby gets thrown out with the bath water’ so most of the issues I now own have been pretty stable.

As always we all can predict (known as a WAG–wild ass guess) the future–of course we have no real clue as to what the future holds–to guide our investing. I used to always formulate what I thought the economy, both domestically and globally, would look like 6-12 months out to formulate my investing, but NOW it is a waste of my time as we are in totally uncharted waters–but I do it anyway.

Right now it looks like we are going to see more ‘lock downs’ throughout the country. So all of the zombie companies that are out there will have to finally toss in the towel. I’m talking some of the airlines, cruise lines, restaurants and bars, some retailers and lodging companies. As I type this airlines are making plans to layoff huge numbers of folks and cruise lines are pushing out sailings further and further. Air travel, while being touted as staging a comeback, is still off 77% from last year. In a business like airlines if your business is off 5 or 10% year over year you are going to be in poor shape–let alone down by 25, 50 or 75%!! I understand some of the amusement parks have reopened in Florida, but no one is showing up. With little air travel crowds are small – will they lose more money when open than they do when they are closed?

Of course my sour mode on the economy can change rapidly if we have a breakthrough treatment for COVID 19, or a vaccine. Neither of these will be in time to rescue the zombies. Borrow more and more money to stay afloat which simply raises your cost of operating as all of the free cash goes toward servicing debt.

I haven’t even touched upon the state and local governments that are barreling toward insolvency. In Minnesota many local governments can’t even open their public swimming pools for the kids–sad. On the other hand if these local governments were managing the city correctly they would have some reserves–but no, they spend every penny they can lay their hands on. In my town they are finally opening the pool on Monday since the governor has finally released the CARES act money to the local governments–helicopter money to bail out the local governments. Everyone complains about high taxes–just wait!!

So I stay invested in the income issues I truly and totally believe in–preferred stocks of closed end funds and utility preferreds and baby bonds. After doing some around the edge trimming in the last 10 days I am down to around 65% invested–I’m fine there and am very willing to forgo some income to sleep at night.

50 thoughts on “Investor Confidence In Check as Unknowns Multiply”

  1. With so many prime assets already sequestered in to private hands, upper tranches controlled AND protected by courts we are entering the phase where ‘socialism’ will never be accepted. Look at what we have left to invest in. The Shadow Powers would rather crash the train and ride out the settling than allow wealth sharing. It is against our Systemic Myth.
    I know this is an abhorrent thought and this site does not want political commentary, but this is evident. Investment advice? Stick to IG and pray. No one in power or participating in power sharing would otherwise expedite the recent years of policy otherwise. There HAVE been other, obvious paths to navigate.

    1. Sorry for offtopic query. Is anyone able log into Silicon Investor? I have tried to access through Google Chrome and Firefox, but I keep getting security warnings and no log in. Firefox suggested the problem is at the website and only Silicon Investor can fix. I am able to log in at other websites with no problem.

      I know that Grid is a regular poster on Silicon Investor.

      1. Looks like they need to update their site certificate. Website is operating just fine.

        In Google Chrome you will need to click allow unsafe and proceed to website button.

        1. Micahc that is what I did also. They have had that happen before in the past, also.

  2. Tim, a good thought provoking article. I think about it often. And yet maintain largely fully invested status, though I waver at times. Definite murky economic future….But yet timing in and out is also problematic for those wanting a skin in the game. Im now up close to 9% this year. Despite the craziness…If I had sat out, I would be with no gains. And yet if I hadnt been home those 2 crazy days in March, I would be lucky now to be up maybe half of that…And yet if I had been fully in cash in March I would be up probably 30%…
    Its just impossible to do the exact efficient income/capital gaining decision every time. And yet if you get sucked into market downdrafts with issues that will pay, you ride it out. Instead of sweating it out with say some of the dubious reit sectors at risk. Worst case I always remember this…DMRRP has paid consistently through… 1) The Civil War 2) WWI and II 3) 1918 Pandemic
    4)Great Depression 5) Economic Maladies of the 1970s and 80s 6) 2008-09 Crisis. ….And if you had been lucky enough to be alive in 1863 to have purchased you would be collecting an 8% annual payment from original issued coupon and sitting on a 60% capital gain….Not so bad, lol.

    1. I’m waiting for one of these tech companys to get that time machine built.
      would love to go back to 1863 and buy it at par
      LOL

      1. Bob, and while on that trip in the time machine, I would make a few stops at some sports books to cash in some sure winners now I know the results, ha.

    2. Grid, you are having an exceptional year. What we really need is for you to launch an ETF. Unfortunately somebody had the nerve to get the ticker “GRID”, so you will have to choose something different. You are up about 9% year to date. Without dividends, here are the other income related asset classes without dividends:

      Baby bonds -4.9%
      Preferreds -14.0%
      UTE Equity aka IDU -15.6%
      BDC -28.6%
      Equity REITS -28.1%
      MLP – 39.1%
      MREITS -39.8%

      So even if you add in 6 months of dividends @ ~ 3.0%, all of them are underwater YTD

      1. Tex if you look at ute area and especially illiquid utes you will see some with nice definable trading ranges and some just move higher. And they certainly arent down minus 14%. Im shocked to see that number. But remember that includes all the sh##thole preferreds that are down 25-75% like hospitality, Mreits, Mall, power strip, MLPs, sectors. Those were house of horrors I dont participate in.
        It comes and goes, I outperformed nicely in 2018 and underperformed some in 2019. That is because I took no hit in Dec. 2018…Which means I didnt get the January 2019 bounce back, so I largely trailed the entire year.

      2. Tex, can you share the benchmarks that you rely on for those ytd returns?

        Thx

        1. Hi NH, the numbers I reported are median returns from ~ 1,400 individual issues I track daily. For example there were 157 baby bonds that went into the -4.9% YTD return. I exclude any issue that did not trade on 12/31/19 and/or 6/26/20. The returns are NOT market cap weighted, they are essentially one share of each issue. I think they are a fair representation of the returns that investors broadly see in each asset class.

          As a side note to Grid’s YTD return, the range of returns for each class is very wide. For example the best baby bond LANDP is up ~ 1.5% and the worst MDLX is down ~ 71%. You can argue that quoting a median return when the distribution is so wide is misleading. Stated differently if you took 10 investors that had individual preferred holdings, they will likely have a wide range of returns.

          Thanks

          1. Tex, Another thing I suspect is different is you appear not to be tracking OTC issues, and that is where a lot of my bacon is being made. Your tracker list shows LANDP as best issue up 1.5%. But I just quickly checked one, AILLL as an example and it is up 5.57% YTD and that isnt including the 2 soon to be 3 dividends for the year either. So this one is basically up over 9% itself. In fact many of these have become over priced and I have been selling into them and buying some of the liquid issues that have sagged in recent 2 weeks. Largely still stick to quality though.
            Edit…I cant edit last one, so I see you did mention dividends werent included.I just forgot, ha.

            1. Grid, you are partially correct. I did not include AILLL that I listed because:

              a) It is not a baby bond and the only examples I gave were baby bonds

              b) even if it was a baby, I still would not have listed it because it did NOT trade on either 12/31/19 or 6/26/20. By eliminating issues that do not trade on both of these dates, I do throw out a few babies with the bathwater.

              For example, HAWEM last traded on 11/22/19. If I used that close price for both 12/31/19 and 6/26/20, it would show as unchanged for the year, which might give the wrong impression to an investor less experienced that Grid!

              Also, I attempt to track every single preferred/baby including Pink Sheets, OTC, AMEX, NYSE, etc without regard to par price. I show par prices from $3.13 (CTGSP) all the way up to $100,000 (FNMFO). I add new issues on a regular basis, but for this particular data they are NOT relevant since they would not have traded on 12/31/19. I include issues that have suspended dividends like all of the PCG’s and FNMFO for example.

              Bottom line I am trying to make it as broad as possible. Normally all of this data is for my use only as it is not reported anywhere else. I did think it was relevant to show how far above the norm Grid’s YTD performance is.

              Thanks

              1. Tex, your endeavor I promise is more expansive and complete than mine could ever be. Besides mine could never be trusted for accuracy since my spreadsheet would be pencil and paper, ha.
                You threw me off a bit because LANDP isnt a baby bond either its a reit preferred. Your HAWEM reference is the landing area I like to play in. And I like those typically that dont trade often and then try to exploit. Buy into liquidity and sell into illiquidity. But like you said statistically tracking is problematic. One like these could trade at say $25, not trade for months and trade at $30, then go on another 4 month sabbatical and then next trade is $25 again.

                1. Grid, of course you are correct that LANDP is NOT a baby bond, but a term preferred. I lump all issues that have a finite redemption date into the baby bond bucket. I think this is justifiable for an issue like LANDP that matures on 9/30/21. It is not as justifiable for an issue like AGO-F which matures on 7/15/2103, but I also include this issue in the baby bond bucket.

                  If interest rates shot up a lot, long dated baby bonds like AGO-F would trade just like regular preferreds without a mature date. They would all get crushed. Whereas something like LANDP would hang close to par, just like a short duration bond.

                  Thanks

                  1. Tex, I appreciated your efforts and posting. I dont really pay much attention to 90% of the preferred/baby bond sector and just stay in my small sliver of a lane. So I was a bit surprised to see how bad some sectors still are relative to yearly performance percentage wise…Glad I wasnt a participant there!

                    1. BTW SPPREIG (s&p investment grade preferred stock) total return (which includes dividends) is down -0.84% ytd
                      Just for comparison

  3. Tim had some really good comments today about the economy and I appreciate his thoughts. There will be lots of trouble with local governments over the next year or so and there could be many that default on obligations. However, I’ll just post some more comments on the REIT chat page, as that is where I kind of live.

  4. Regarding the banks, I think the Fed is mostly bark with just a little bite—like freezing dividend levels and stock buybacks. If the major banks go under, the economy goes under until the banks are made solvent again. We’ve been down this road before and the last thing the Fed wants is to have another banking crisis.

    1. Randy, I don’t expect a large collapse of banks, however its investors perception of them and if dividends were suspended at just a few, the whole sector will fall out of favor. The Fed’s have tools available they haven’t even used yet, like restricting or freezing withdrawals, or even a bank holiday. This besides adding liquidity

      1. In the past it was savings and loans and banks that focused on lending to consumers like auto loans, credit card, real estate and even business loans. But rarely did all these sectors have troubles at the same time.

  5. I believe the broader market will respond sharply in the coming months to whatever news comes its way – good or bad. However, other than a vaccine, I don’t see much in the way of possible good news.

    More likely dismal Q2 and Q3 earnings, burgeoning debt, bankruptcies, and a growing corona-virus couples with a disjointed federal government response to lead to a sharply downward trend in the coming months.

    Hard to be optimistic pre-vaccine.

      1. Camroc, my nephew and his girlfriend decided to go tasting in the wine country since tasting rooms opened back up last weekend. He decided just for the heck of it, to get tested and came out postive. Him and his girlfriend live at home with his sister, and parents. Now whole house is under 4 week lockdown. The hospital is now short another person because his sister can’t go to work , him and his girlfriend work at Tesla and Google but not sure if they been to work and his 63yr old father is on auto immune drugs.
        Only good thing is he is volunteering for study at Stanford to help doctors

  6. I am terribly pessimistic. The market since the March selloff has been in Wonderland spurred on by the stimulus and the fed. With 6.5 million predicted unemployment by years end and tens of thousands of small businesses yet to close and never re-open the real question in my mind is how we can possibly avoid a severe recession. Hope I am wrong, but …

  7. There are probably a lot of possible factors that are going on including Biden’s prospects and the Econ consequences of a Democrat administration. As bad a week as it has been for common, preferred’s haven’t moved down very much. I was much more worried when the market went above 27,000 a month ago: the exuberance seemed crazy. This week the market seems to be saying: don’t come close to 26,000 until Covid 19 is figured. The new caseload is scary but not lethal, at least Not yet. And if caseloads don’t jump in cities with high protests, then we really don’t understand how this disease is spread or works.

  8. Tim M- Thank you for sharing your perspective. When a conservative investor (who invests in preferred stocks of closed end funds and utility preferreds and baby bonds) is 65% invested, to me it says a lot i.e. lack of confidence in the market and its recovery
    Is anyone else seeing any green shoots which I may be missing?

  9. the big question for me, hoping someone here knows the answer, is if certain banks now suspend their common dividends because of the Fed, do the preferreds also get automatically suspended? also, can bank preferreds get cut and not suspended like commons? i only hold a few (from the major banks) so don’t know much about what happens in this situation.

    1. Franklin; Iam hoping there is a banker or even retired banker in the group that can answer your question as I have been thinking the same exact thing actually for several months now. One thing among many I have learned its pointless to call the actual company with that question as they will give you your usual scripted answer. And after you hang up will quickly realize it was a total waste of your time to have called them.

    2. Franklin, I cant give you a bank expert answer, but no, 100% no…Now that doesnt mean it couldnt happen together, ala PCG when they had the fires a couple years ago. But there are many Reits for example have recently suspended common and continue paying preferreds. Or they have reduced dividends on common and still pay preferreds.
      I know that isnt bank examples but process is similair. Of course Fed actions could mandate it though. But it will be a two step process not one. Preferred stock dividend will be declared and then common declared separately with preferred stock getting first priority.
      There have been a few Puetro Rico banks the past decade be constantly in financial trouble. They would suspend common, and then sometimes pay the preferred and sometimes missed a few depending on where their ratios were at that quarter. But they definitely tried to pay it. They just didnt try to screw preferreds over out of their dividends.

      1. Appreciate your reply Gridbird.

        Yes, agree in general that regular and preferred dividends are different and banks will likely continue with the preferred dividends. The fact that the bank preferreds did not sell-off after the Fed announcement just affirms the same (for now).

        But what is to stop the Fed to jaw-bone saying it may be prudent for them to pause all distributions ? Also there is always that pesky clause in most bank preferreds about not being treated as Tier-I capital and thus can be redeemed and Fed / Congress can declare them not Tier-I ?

        1. Msquare, just a novice opinion here…But these preferreds will always be treated as Tier 1 capital. This is exactly what regulators want. See banks used to use “Trust debt securities” which was actually debt contorted into capital.
          Since they were legal obligations this caused problems in accruing problems and needing bailouts to pay if bank was to stay solvent or be acquired.
          So regulators mandated non cumulative preferreds. This way they are essentially common stock dividends as there is no accruing of suspended dividends that may prove onerous to repay. Banks really dont have to issue preferreds and just issued boatloads of more common stock and it would be treated the same. But the banks dont want all the earnings dilution from more common shares.
          Obviously ultimately I have no idea about how bad it could get or what the Fed would do. Admittedly I dont own much in this sector because of the fear of the unknown myself. That is why my general preference is more utility preferreds as most have recoverable clauses in rate case filings to recover “getting stiffed”. I read the credit rating report for weakling Pacific Gas and Electric exiting bankruptcy now. Cova was mentioned as a risk for PCG in terms of payments near term. But they also said it wouldnt have an overall material effect long term on their finances and they were not rated down from this risk.

          1. I think Enron invented trust preferreds back in the 1990s. Provided a way to issue a “preferred” security with deductible interest. They caught on with many types of issuers in cluding banks. There’s always been a debate as to whether
            trust preferreds were debt or equity. The question arose with regulators in regulated industries. Same sort of question comes up today as to how to classify today’s hybrid securities such as junior subordinated securities. I think
            in most regulated industries such hybrids have a split percentage by regulatory bodies. A portion counts for equity, a portion debt.
            After the GR, bank regulators cleared this up for that industry by requiring that
            this type of security must be non cum traditional preferred stock. Other industries such as utilities use hybrids which allows tax dedcutible interest for the issuer and non QDI income for the investor.
            Personally, today, in general I consider regulated industries to issue the best type of income securities whether they be hybrids or traditional preferreds.
            Most are IG which for me means I assign them the lowest risk of income deferral.
            In fact S&P issues an updated study annually that reviews defaults on corporate bonds over a 40 year period.. The lowest industry group of defaults over the past 40 years is insurance followed by utilities and then banks. Other industry groups had higher default rates than these three. I use this data for guidance in my investment decisions. Bottom line though, there are no guarantees and never have been.

            1. As a footnote, insurance, utilities and banks are all regulated industries.

            2. Great info Razor! Thanks for sharing….Just to add most ratings agencies will also assign a percentage debt/equity percentage to all capital stock preferreds from any preferred.
              Surprised Insurance issuers had your best safety level. They trade “more suspiciously” than banks or utes….Showing my bias here but there hasnt been one utility preferred stock that hasnt paid since Great Depression that I have found, outside of PCG which will pay soon. Keep in mind I mean real traditional regulated utility, not bogus fake Enron types that dont meet my definition of a real utility.

              1. Grid,
                the difference between default rates for insurance and utilities and for that matter banks is very small but insurance currently has the edge. Like you
                my favorite of these 3 is utilities. But i do invest in all 3.

                1. Razor, the bummer part is the utility preferred yield is considerably lower and most well over “par”. I would like to know their definition of a utility as I would bet the ranch it is considerably more expansive than my definition is.

          2. Similar to a cumulative preferred is the rise of deferred interest debt like our old friend Hillman and Old second where the interest accrued until they resume or go bust.

            1. Justin, I know you are aware of this, but I think some people give too much credence to these and some too little. Some think the deferral clause as some scam, and avoid them while yet buying preferreds, and others overweight their safety being debt.
              The rating agencies certainly arent fooled as they weight these more an equity issuance than a debt one. Though the maximum deferral period does at least initiate a final outcome if needed. I presently own three so I am certainly comfortable with them.

    3. A bank would have to cut its common dividend to zero before it could stop paying on its preferred. If survival was at stake I could see it happening but otherwise not so much. It would be a very big deal for a bank to stop paying on its preferred. Banks are dependent on constant access to capital markets at favorable rates. If the preferred were suspended it would limit access to capital and certainly raise the cost.

  10. We have thrown away all the stimulus money. After all that money, our case counts are back to where we started. Europe, Korea and China recovered so far and got some bang for their money.

    Unfortunately IMHO we did not get the bang for our $$$$$

    I

    1. SteveA–agree. The bonus unemployment goes away in a month–unless they renew it or do something different (I hope) and I expect to see higher foreberance levels on mortgages etc. Things are dangerous for investors.

        1. Yes Charles M–they mention Iowa State (Ames) and Iowa U (Iowa city), but we had a flareup just south of us at Minnesota State. Foolish kids in bars–probably could have been me 45-50 years ago.

          1. Unfortunately those foolish college kids can spread the virus to vulnerable family members, as was the case in Austin Texas recently. 18 family members exposed to CV at a family birthday party, 11 tested positive, and the three family members over 60 were hospitalized with the oldest in ICU. Ignoring the virus will not make it go away, and I have a new found respect for the folks who won’t shake hands and always cover their nose and mouth in public.

          2. Tim, I posted that more out of concern that it vindicated what you had been saying about city, county, and government budgets and the short falls that are happening. The article even covered budget shortfall of a water company used to greater water usage because of the town’s population when kids are away from home at college, Even the worry that federal spending based on the census would affect budgets since kids woulds wouldn’t be counted as part of population with staying home.
            Davis with its Aggie’s is just a short drive east of me. Know the town pretty well

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